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The Capital Structure Puzzle: What Are We Missing?

Published online by Cambridge University Press:  14 January 2022

Harry DeAngelo*
USC Marshall School of Business
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An important piece of the capital structure puzzle has been missing, and it is not a contracting friction. It is recognition that managers do not have sufficient knowledge to optimize capital structure with any real precision. The literature critique in this paper i) identifies the conceptual sources of the main empirical failures of the leading models of capital structure and ii) shows how those failures can be repaired by taking into account imperfect managerial knowledge and several other factors. The analysis yields a compact set of principles for thinking about capital structure in an empirically supported way.

Research Article
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This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (, which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington


I thank Malcolm Baker, David Denis, Eugene Fama, Andrei Gonçalves, John Graham, Jarrad Harford (the editor), Gerard Hoberg, Jonathan Karpoff, Arthur Korteweg, Stewart Myers, Christopher Parsons, Rodney Ramcharan, Jay Ritter, Richard Roll, Andrei Shleifer, René Stulz, Sheridan Titman, Ivo Welch, and an anonymous referee for helpful comments. I owe special thanks to René Stulz for many useful discussions on this paper and, more generally, about corporate finance over the last 40 years.


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